TheStreet.com Ratings: Top 10 Small-Cap Stocks

Each weekday, TheStreet.com Ratings compiles a list of the top 10 stocks in five categories -- fast-growth, all-around value, large-cap, mid-cap and small-cap -- and publishes these lists in the Ratings section of our Web site.

This list, updated daily, is based on data from the close of the previous trading session. Today, we look at small-cap stocks. These are stocks of companies that have market capitalizations of between $50 million and $500 million and rank near the top of all stocks rated by our proprietary quantitative model, which looks at more than 60 factors.

In addition, the stocks must be followed by at least one financial analyst who posts estimates on the Institutional Brokers' Estimate System. The stocks are ordered by their potential to appreciate.

Up first today is Preferred Bank(PFBC Quote), which has 10 full-service branches focused on California's large Chinese-American population. The company's stock has earned a buy rating since December 2005. The stock should outperform most stocks we rate on the basis of its steady EPS growth, positive increases in net income, compelling return on equity and solid stock performance.

The stock is relatively more expensive than its peers. However, Preferred Bank shows no glaring weaknesses, and its strong financial performance justifies its higher price level.

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KMG Chemicals(KMGB Quote), rated a buy since March 2005, makes specialty chemicals for about 135 clients. The company shows impressive EPS growth, a low debt-to-equity ratio, outstanding net income growth and strong stock performance.

These positives outweigh KMG's weak operating cash flow.